I am not convinced that the ECB will drop rates. I believe it is in their interest to have people thinking that a rate drop is on the way. For this they get a slightly devalued Euro.
The ECB is concerned with inflation only and inflation is historically very high along with money supply.
That said. It would be interesting to discuss what would happen if the ECB dropped rates 50 basis points by August 2008.
It would seem the banks have or are planning to pass on cuts to their customers. AIB,ESB,IP/TSB/IIB have all dropped or are about to drop FIXED RATES, not variable rates or trackers.
So what will happen to the housing market if rates are dropped?
Dropping fixed rates is easy for the banks, because fixed rates are linked to the euro swap rate curve and are only indirectly influenced by the ECB rate. There has been a big shift down in the swap curve over the last couple of months. This doesn’t mean that variable and new tracker customers will feel the full benefit of ECB cuts when they come.
BB I agree with you. Another reason the ECB might like to give the impression that it will drop rates is to prevent second round effects - wage agreements in variable/tracker rate mortgage countries take account of the cost of mortgages.
A rate cut would be the start of the long-awaited bull trap, the VIs will redouble all their spinning, the buyers (or at least the more easily duped ones) will pour back into the market and the PTSB/ESRI index might even show a rise for the first time since January '07.
A 0.5% rate cut would bring us back to 13th March 2007, at which time house prices had already been falling for several months. So with the general tightening of credit in the meantime, the slowdown in the economy, and the debunking of the “property only ever goes up” myth, I don’t think that a rate cut or two would reinflate the bubble for longer than a month or two.
The problem with a rate drop is what conditions will be in place to cause it. If the ECB drops rates then we could probably assume the US is in a full blown recession. In this case one reason to hold off buying a house will be replaced with another. I.E. not being able to get a big enough mortgage and fear of negative equity will be replaced with extreme job insecurity and an even further tightening on lending.
If a bank fears you’ll loose your job then they will be looking for a big deposit to cover their hoops in case they have to chuck you out and sell up.
This will sting the banks that bet on an earlier cut, after all the ECB does have a point to make to these people who have loaded half a trillion of rubbish onto the ECB in Repo operations since last summer … and in certain countries like Ireland and Spain the banks will not pass this first cut on anyway keeping it all fro themselves.
Therefore the ECB will not listen to them when they demand a second cut because it is of no benefit whatsoever to the general economy .
The second cut looks like september october time to me .
slightly confused by some of the statements/questions above. here is my version.
the underlying in an interest rate swap is typically 3M or 6M Euribor. For example bank A receives a fixed annual payment of say 4% of some notional from bank B and pays bank B the floating 3M Euribor fixing every three months (with appropriate accrual) on the notional. To bet that rates are going down you receive fixed (go long the market).
implied (e.g 6M) Euribor rates can be extracted from the interest rate swap curve out to many years, even if these are not quoted directly. (e.g from the swap curve you can extract the implied 6M euribor fixing in 30 months time or any other maturity you want).
the euribor fixings themselves are interbank deposit rates and are ECB rate + credit spread (for a typical AA rated bank). so the swap rates reflect market expectation of ECB rates plus a credit or swap spread. exploding swap rates indicate trouble ahead. it is the high swap spread that has been burning the banks recently. if you want an index of the health of the financial system as a whole the swap spread is not a bad one.
the 3M euribor futures market and the swap market contain the same information.
Sorry, maybe I confused things. If you have access to swap rates then that’s the quickest and easiest way to determine where fixed rates are going. You can reverse engineer (bootstrap) a swap into euribor futures if you like but the swap reflects the cost of borrowing at a fixed rate so for the purposes of this thread there’s no need.
A bank which is receiving fixed payments for 3 years from a mortgage holder has interest rate risk. If they want to hedge this risk then they can enter into a 3 year swap, hence it’s the swap price which determines the fixed rate.
I disagree with you.
Iif you have a tracker mortgage then as the name implies it tracks the ECB. you are given x% when you negotiate your tracker mortgage. this means that you pay x% above the ECB. if the ECB rises your mortgage rises. if the ECB falls well then your mortgage falls.
they probably wont pass on any ECB cuts to variable custsomers , but they have to pass on the ECB cuts to trackers.